Thursday, December 22, 2011

The Miracle of the U.S. Manufacturing Sector

Following up on the "Magic and Miracle of the Marketplace" post below, the chart above shows that the decline in prices over time has taken place for almost all manufactured goods, not just for electronics. As a percent of consumer expenditures, the combined share of spending on food, cars, clothing and household furnishings (furniture, appliances, etc.) has fallen over time from close to 50% in the late 1940s to close to 16% in 2010. This decline in spending over time on manufactured goods, measured as a share of all consumer spending, is really a testament to the remarkable productivity of the manufacturing sector, which leads to declining prices relative to income and services, and increases our standard of living dramatically over time.

If you are old enough, you remember black-and-white TVs with tubes that went baloney. You can remember families discussing a new TV purchase for a quite a while at the dinner, then shopping multiple venues, etc. It was a big event.

You can remember radiators that overheated, tires that popped often and dashboards that were lethal in a light collision.

I bought a TV recently for $200. Wow-wee, and it is color with remote. Really, lunch with a blonde with big boobs costs me $65. It is hard to say which produces more inane conversation. When I move, I likely will leave the perfectly good TV on the curb, or sell it through Craigslist for $25. The next guy will have a great color TV for the next 10 years.

Larry G. does raise an interesting question. How does Germany pay its workers so well? It is an exporting powerhouse.

If Morgan is right, and we have drastically undercounted inflation in the USA, then the Euros have higher living standards than we do---and six weeks off a year, and national health insurance. What gives?

"but if you took this chart and subtracted out the lower costs goods that came from China, India, etc... what would the chart look like?"...

What would it matter? If you're that concerned by displaced workers tell me then how many of those people have you personally taken into your domilcile, fed out of your pantry, and gave them clothes from your closet...

" decline in prices over time has taken place on all manufactured goods not just electronics..."

but the title says "the miracle of the US manufacturing sector".

in terms lower prices and productivity.

if something is manufactured less expensively by lower cost labor then that is not the same as labor costs that did not change but productivity improved.

in the former the result might be more jobs but lower paying jobs.

in the latter, increased productivity should mean less need for the same level of labor.

so there are two things that can lower price of goods - higher productivity and/or/both lower labor costs.

if a shirt is lower in price because it is now made in India for 1/4 the labor costs then the lower price that results in more discretionary money to spend on other things.. may not be spent for American-produced goods - even if better productivity if the prices of the same goods overseas is lower due to lower labor costs.

the things that we manufacture that do not get as easily offshored are "U.S. Manufacturing" of goods that required skilled labor rather than commodity unskilled or low skilled labor.

Any goods that can be produced with unskilled labor is going to the lowest world bidder.

the manufacturing that we retain are the goods that cannot be made with low skilled labor.

Larry G: "the things that we manufacture that do not get as easily offshored are "U.S. Manufacturing" of goods that required skilled labor rather than commodity unskilled or low skilled labor."

Low wages are not the only reason manufacturing has been offshored. U.S. regulations - especially environmental regulations but also labor laws - have caused plants to be moved.

Fleeing U.S. government regulations is nothing new. Decades ago I worked during the summer in a Louisiana petrochemical factory which was moved in the mid-70s to some Carribean island because of the EPA.

Some "offshoring" was not the result of a particular company's decision, but rather the result of government interference which made the U.S. plant lose out to its international competitors.

morganovich: "food is much worse (not organic, full of chemicals, less nutritious)"

I think that's a statement of opinion, and not a fact. Based on what's important to me, the quality of food is far superior to what was available in 1964.

First, food from the 1960s was full of chemicals. The chemicals have changed, but I do not believe for the worse.

Second, the food available at urban supermarkets is today far more varied than what was on the shelves in 1964. Very few organic foods were available back then. Exotic vegetables and fruits were just non-existent.

Third, prepared meals of today available in the frozen food sections are far supeior to the few Banquet and Swanson TV dinners of 50 years ago.

VangeIV: "Why doesn't the housing price explosion of the early 2000s show up on this chart?"

Not sure what you mean. This is a chart showing expenditures for food, cars, clothing, and household furnishings. What were you expecting to see on the graph?

FYI, the housing price "explosion" was not an explosion for all regions and for all consumers. Only those people in certain states who happened to buy homes in the early 2000's would have seen mortgages go up.

morganovich: "gasoline is worse (lower energy content due to ethanol)"

I disagree. Gasoline produced at today's refineries is superior to what was produced 60 years ago. MTBE has replaced lead as an oxygenator. Top Tier gasolines introduced in recent years, such as Chevron's Techron gasolines or Shell's Nitrogen Enriched gasolines, have been proven to keep engines cleaner,

Your argument is not about the quality of gasoline, but tather the fact that government does not allow consumers to purchase just gasoline at the pump.

Not everything is cheaper. Energy, for example, is more expensive. The total tax burden is much higher.

What has realy changed is the amount of goods we consume. The average middle class home of 60 years ago was much smaller than what is bought today. Households buy many more goods to fill up those bigger homes. For example, most middle class homes of 1964 had one television. My home today, with four televisions, is probably a typical middle class home.

We also buy many goods which did not exist 60 years ago. Personal computers, cell phones, and laser levels are three examples.

I have three color TVs with bigger than a 50-inch screen and central air conditioning. I grew up with one 19-inch black-and-white TV, and we used a window fan in an open to cool off.

I have two cell phones, a corded land line with two other cordless phones, a wireless lap-top computer, two desk-top computers, amd two blue-tooth hearing aids to tie all this together. I'm high-tech, and I'm wired. It's cool. To those who yearn for the 1960s, stick that in your 1960s if you want me there with you.

As morganovich pointed out, we have a much wider range of quality choices today, than in the past. Improvements in technology and productivity have caused some goods, especially electronics, to improve in quality and function while still costing less.

Other goods, such as furniture and clothing have become more varied in quality, as some people have found they value the lower price more than the higher quality.

This is an excellent example of production creating demand. By introducing clothing, for example, of lower quality and lower price, manufacturers have created a greater demand for their products. Someone who might have bought 1 high quality shirt for $90, might now buy 3 lower quality shirts for $30 each.

As a consumer, it's not really important to know where something is made, or why it's cheaper, only that it is.

The original post shows how much less we spend today on four basic needs as a percentage of total consumer spending, without considering any possible quality changes in these goods. As comments suggest, some quality is higher, and some lower.

The complaint many here have about quality as used by the BLS in calculating CPI, is the impossibility of determining, quantitatively, how much each of us values changes in quality. At best we can say that we consider the quality of something to be higher or lower, but to say it's 10% higher is meaningless.

The BLS uses quality measurements to tell us we are way better off than real inflation numbers indicate.

This is true but keep in mind that the increase in price is adjusted for 'quality'. The reported trends reflect these adjustments and overstate the price declines.

clothing is much worse and less durable.

I am not sure if I agree entirely. Yes, some of the cheaper quality clothing is terrible and is useless after a few times of wear. But some of the fabrics are much better engineered and offer more value than in previous periods.

food is much worse (not organic, full of chemicals, less nutritious)

I don't buy this. Organic is not all that important because the chemicals used are present in such low dosages that the benefits of using the chemicals offsets the harm done by consuming them.

Not sure what you mean. This is a chart showing expenditures for food, cars, clothing, and household furnishings. What were you expecting to see on the graph?

FYI, the housing price "explosion" was not an explosion for all regions and for all consumers. Only those people in certain states who happened to buy homes in the early 2000's would have seen mortgages go up.

Sorry, I wrote too quickly and was not clear. You can't just cherry pick items and say that prices for all kinds of things are falling. You have to look at a comprehensive basket of goods and see how well that works. (For the record, I am one of the people who claims that each person has a unique basket of goods so it is not possible to have a meaningful discussion about prices but I will forget that argument for a while and look at the basket that has been used for CPI.)

My argument is that things are not as Mark wants to make them because at the bottom of it we still have to account for the difference between being able to raise a family in comfort on one forty-hour salary in the 1950s and 1960s versus the need to have two salaries today and to put in much more than 40 hours a week for your average middle class job.

The disconnect is too large to play the game that Mark is playing. First of all, the massive growth of government has meant far more taxes at all levels. Not only do you pay much more in payroll taxes starting at the first dollar but you pay more in property taxes as well as more in duties, fees, charges, etc., on most of the items you buy. The extra income that goes to pay for the larger government reduces your real purchasing power. So doe the fact that one way the government makes its growth palatable is the use of inflation of the money supply to pay for it.

And let us not forget that the growth in the regulatory environment has been a burden on productivity growth. In most cases products and services would be much cheaper if the companies that produced them did not have to spend so much money on complying with useless regulations.

House prices doubling is a result of houses actually selling for twice as much as before. You can only say that the *estimated* price of your house has doubled, based on sales of comparable houses in your your area, unless you actually sell it.

The only relationship to mortgages is that easy access to credit with little or no down, and little or no credit worthiness, caused greater demand and much higher prices.

It's still there, along with all it's newly printed cousins from the Fed. The greater supply of currency, like an increased supply of any other commodity, causes the cost of each dollar to drop, relative to the things you purchase it with.

vangeIV: "The disconnect is too large to play the game that Mark is playing. First of all, the massive growth of government has meant far more taxes at all levels."

Mark is not playing a game. I think you are. Mark's post is about how the private manufacturing sector has made all of our lives better. You try to change his assertion by arguing that he did not include the negative effects of government interference and taxation.

I'm sure that Mark would agree government and taxes have worsened our lives. But that does not change at all the fact that the private manufacturing sector has drastically imnproved our lives.

You can argue all you want about how government has harmed our standard of living. But that's neither the content of Mark's arguments nor the content of almost everyone else who has commented about it.

vangeIV: "It certainly is not good for our vehicles when 10% of our fuel is in the form of ethanol. "

But, again, a government mandate does not change the fact that gasoline manufacturers have greatly improved the quality of gasoline we buy. That our government forces us to also buy ethanol does not refute Mark's assertion that the manufacturing sector - including our refiners - have improved our standard of living.

vangeIV: "The irony is that the BLS assumes the quality has improved because the wood comes from a sustainably farmed lot."

I do not believe this is true. Do you have any evidence that the BLS includes "sustainability" when it derives the chained indexes of producer prices? Do you have any evidence that BLS economists use "sustainable farmed lot sourcing" as a criterion in selecting the lumber producers included in the price calculations?

Mark is not playing a game. I think you are. Mark's post is about how the private manufacturing sector has made all of our lives better. You try to change his assertion by arguing that he did not include the negative effects of government interference and taxation.

Nobody disputes the statement that we have seen a massive improvement in productivity. But what Mark is trying to argue, and you would know that if you look at his many postings on the issue, is that we do not have an inflation problem. That as far as he is concerned families have much better and easier lives today than they used to not very long ago.

What I am arguing, along with Ron, morganovich, and some others here, is that the productivity increases were partially offset by a huge increase in monetary expansion. Instead of seeing the effect of the productivity improvements as declining prices across the board we see the opposite. While some items are clearly cheaper today than they used to be, most prices are significantly higher because the money has lost purchasing power.

We are arguing that the expansion of government has made people much poorer than they would have been. Ours is the broken window argument. Given that it is so simple to understand it is interesting to see that so many otherwise intelligent people refuse to try to understand.

I'm sure that Mark would agree government and taxes have worsened our lives. But that does not change at all the fact that the private manufacturing sector has drastically imnproved our lives.

That is not the argument. The argument is about the net effect. Has private investment and productivity really put us in a better position when we have to consider the liabilities that have been accumulated in our name? Mark seems to be far more optimistic on this question than your typical rational individual.

You can argue all you want about how government has harmed our standard of living. But that's neither the content of Mark's arguments nor the content of almost everyone else who has commented about it.

I think that this thread is one dot in many that have to be connected. Clearly Mark picks and chooses data to support his optimistic view of the world. I prefer neither optimism not pessimism because what matters most is reality.

But, again, a government mandate does not change the fact that gasoline manufacturers have greatly improved the quality of gasoline we buy. That our government forces us to also buy ethanol does not refute Mark's assertion that the manufacturing sector - including our refiners - have improved our standard of living.

I would argue that without government the fuels industry would have produced much better products than what we have today.

I do not believe this is true. Do you have any evidence that the BLS includes "sustainability" when it derives the chained indexes of producer prices? Do you have any evidence that BLS economists use "sustainable farmed lot sourcing" as a criterion in selecting the lumber producers included in the price calculations?

Here is what the BLS does.

"A quality adjustment has been made to gasoline prices in the January CPI to account for the effects of the mandated introduction of reformulated gasoline in selected areas of the United States. The gasoline index rose 0.4 percent in January, following seasonal adjustment. Without the quality adjustment, it is estimated that this index would have increased 1.1 percent."

Got it? It adjusted away the price increase because of a 'quality improvement' for the gasoline. We were supposed to feel better about the 10% increase because the gasoline burnt better in engines that have carburetors. (Note that new cars with computer controls have no need of the additive but that is another story.) Ironically, the additive was found to be harmful later and was eventually removed from gasoline. The data was never readjusted to correct the BLS BS assumption.

The quality adjustments give the BLS the power to choose what figure to report irregardless of what happens to the actual prices of the goods in the CPI basked. As such I would not believe much that came out of the BLS and would rather pay attention to the private assessments instead.

I think I'm with vange and morganovich on this one. Are you really better off if it takes two incomes to buy a lot more stuff, even cool stuff, when much of it is junk?

I am not saying that the cool stuff is junk. My point is that we can't raise a family on a single salary based on a forty hour week. I think that the evidence points to two big reasons; taxes and inflation. Yet, we have the optimists telling us how great things are even as the boomers are heading towards retirement with less than a year's worth of living expenses in savings.

Funny how people earning just $30,000 a year manage to have 3, 4, and 5 kids.

Most of them rely on food stamps and government transfer programs.

You have no clue how your definition of 'needs' quickly inflates upwards.

Sure I do. I see it all around me.

In the old days, kids slept in bunkbeds, you know.

Some of them still do.

You also seem to be pretty poor at budgeting your own money.

Really? I worked for 15 years and never earned an extraordinarily high salary. But I saved enough during those 15 years to be able to afford to retire in my early 40s. I would say that shows that I am very good at budgeting.

As others have said, you points are full of holes, and factually wrong.

hydra: "Are you really better off if it takes two incomes to buy a lot more stuff, even cool stuff, when much of it is junk?"

I disagree with both of the implied points in this question. But let me respond to just one.

The typical middle class household of the 1950s and 1960s did have two adult workers. In many cases, the female spouse did work at a paying job. But in many households, the female spouse held an unpaid job: housewife.

What has changed since 1964, is that most female spouses work at paid jobs. The housewife tasks performed back then have been transferred to the "paying" sector. Today's middle class households eat more meals away from home and consume more pre-processed frozen foods than did such households 50 years ago. Pre-school children today are much more likely to be partially raised by child care businesses.

What are the economic benefits of the movement of housewives into the paid workforce? They inclde:

- a huge increase in the quantity of highly skilled workers (female engineers, computer programmers, and physicians are examples);- economies of scale in food preparation and child care;- a giant expansion of overall economic output (and standard of living).

The HDI combined three dimensions up until its 2011 report:Life expectancy at birth, as an index of population health and longevityKnowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting).Standard of living, as indicated by the natural logarithm of gross domestic product per capita at purchasing power parity.

I think that is factually wrong. Those that cannot get by on $30k are more likely to work multiple jobs and have gray market income..

All I know is that around 14.5% of all US households were on food stamps last year. It seems to me that an income of $30K for a family that has, "3, 4, and 5 kids" would be eligible and would be on the program. (Along with other federal, state, and local programs.)

How does your hypothetical family manage to buy insurance? Or manage to purchase a home? After all, FICA taxes apply to the first dollar earned by your hypothetical wage earner. S/He has to pay $2,295 in Social Security and Medicare taxes. Assume no other taxes and our family is has $2,310 per month. So let us look at how a budget would break down and tell me where I have gone too far. (Assume three kids.)

There you go. Note that I did not purchase health insurance, go to the dentist, use any form of transportation, take the kids to movies, have a birthday party, give gifts to anyone, etc.

What I have put together does not seem very unreasonable. Yet, the family runs out of money and has to do without certain essentials unless it gets help from external sources. Sorry but your claim is not very credible unless you have someone who is extremely disciplined very early on in the game and knows how to save and invest his money even when income is low. There are few people like that in your country.

That may be your argument, but it is not Mark's argument in either this comment or the one he was following up on. You have not refuted the conclusion of either of those two posts by Mark.

If you take Mark's postings in context you get a good idea of what he is saying. He claims no inflation and a huge increase in the standard of living for families. Yet, he ignores the fact that the one income middle class family that can make ends meet and save for the future is a thing of the past that he is trying to distort. And many others on this thread are dancing to that music without awareness of the actual reality around them.

Yeah, I got it. When you are challenged on an indefnsible point you make, you ignore the question altogether.

The fact that the BLS is distorting the true picture and does not use the same methodology as it used to pre-Boskin is not indefensible. In fact, those of us who have been aware of the issue have done very well over the past decade and a half by not believing the BLS reports. It is amazing how well you can do even when being lazy if you simply see things as they are. You might want to try it.

The typical middle class household of the 1950s and 1960s did have two adult workers. In many cases, the female spouse did work at a paying job. But in many households, the female spouse held an unpaid job: housewife.

Really? What is a housewife? What does she do and what happened to all of the things that she used to do? If given the choice would most women choose to look after their kids when they are young and then go into the workforce or would they choose to dump them in daycare while still in diapers so that they could earn a few bucks?

And what happened to the hours worked? We know that a forty hour work week used to be enough to take care of the average family. Can you say that the same would be possible today?

Much of what passes for education is fairly useless. It is simply indoctrination. What matters is the number of useful and creative people that the system produces. On that front I would still have the US ranked at the top of the list because the few very capable individuals (think Gates, Jobs, Ellison types) make everyone's life better. The stats take points off for people like Jobs and Gates because they dropped out of school.

Standard of living, as indicated by the natural logarithm of gross domestic product per capita at purchasing power parity.

Good luck trying to convince anyone that the methodology makes any sense.

vangeiv: "he ignores the fact that the one income middle class family that can make ends meet and save for the future is a thing of the past that he is trying to distort"

One income middle class families are rare today not out of necessity. It's simply because of choices made by women and by households. Women desire to be more than housewives. Households desire and consume far more goods than they did in the 1960s. Family sizes are, by choice and by technology, far smaller than in the 1960s.

But it is out of necessity. The average middle class job does not pay enough for forty hours of work per week to raise two kids and have the woman stay at home. But it did in the 1950s and early 1960s.

It's simply because of choices made by women and by households. Women desire to be more than housewives.

I do not dispute this. I dispute the fact that those that don't desire to work can afford to stay home and have a decent standard of living on their husband's salary.

Households desire and consume far more goods than they did in the 1960s. Family sizes are, by choice and by technology, far smaller than in the 1960s.

I do not agree. People liked to go out in the 1950s and 1960s. They liked to buy new cars and go on vacations. They bought TVs and radios, took the family to Six Flags and rented cottages on the local lake. But in those days they did not remortgage the home to take a vacation to Mexico or buy a new boat. Their purchases was made out of savings.